I Was Wrong

I Was Wrongby Stephen DuneierFirst published April 2, 2105

﻿﻿For months now, I have been arguing that three key elements have been the driving force behind everything else happening in the world. I was wrong.

What I had been espousing is that technological innovation, urbanization and wealth disparity are the key elements. I then compared this moment in time with the previous periods when those three had occurred simultaneously, along with the issues that developed as a result. Where I erred is in identifying urbanization and wealth disparity as key elements rather than as the derivative issues they are. And yes, the distinction matters.

In December, I wrote a piece titled, Rise of the Machines in which I went back 2.6 million years to the invention of the very first known tool and therefore the very first leap forward in the evolution of technology. I later described what it must have been like for a highly skilled “hunter” or “gatherer” to have their contribution to society devalued almost overnight with the introduction of farming. No one, not even the hunter would have argued against the tremendous efficiency and resulting improvement in the quality of life it provided for society as a whole, but there is no doubt it must have been painful for them to have their place in the hierarchy so radically diminished. My point in telling those stories, was to introduce context for what we are experiencing today, for it is merely another chapter in this ongoing love/hate relationship between humans and the technology we develop to make ourselves more efficient.​I think it’s helpful to think of technology as synonymous with efficiency, where efficiency is defined as “a measurable concept, quantitatively determined by the ratio of output to input.” In simpler terms, when technological innovation experiences a leap forward, it means that in order to harvest the same acreage of wheat, produce the same number of widgets or file the same number of tax returns, far fewer inputs are required. Technology becomes disruptive when those inputs which are suddenly required in far smaller portions across a wide swath of the economy, are human beings. Although it has been happening for millions of years, we really only have useful data to call upon from the two previous periods when technology leapt forward — the late 1800’s and second quarter of the 1900’s.

By recognizing that it was the introduction of a highly efficient technology that served as the catalyst, everything that follows makes perfect sense, but perhaps just as importantly it helps provide a framework for discussion about the social implications, and potential solutions. Rather than this becoming an argument between two sides, we should be thinking about leaps forward in technological innovation as something akin to a natural disaster, or in insurance parlance, “Acts of God,” for their impacts are similarly disruptive, and equally unintentional.

Within this framework, we come to understand that the spike in wealth disparity isn’t the result of some devious plot by any one individual or group, but merely a natural bi-product of the replacement of an expensive input for a new, less expensive one. The key being that the inputs being replaced are human beings and the beneficiaries are the owners of capital. By comparison, when horses were later replaced by gas powered tractors, it was the exact same mechanism at play, but with far different societal and economic implications, because horses don’t receive compensation, vote, feed their families, have hope or understand the concept of fairness.

It is the fact that this type of leap forward in the evolution of technology simultaneously reduces the value of the majority while a tiny minority very naturally reaps the benefits of the resulting efficiency, that makes it so disruptive. There are so many obvious derivative effects of this occurrence. Many of which I have been writing about.

For instance, in Participation is Half the Battle, I provided historical context for the sudden surge in college attendance, similar to what we saw in education during those two previous eras when technology displaced so many workers. There is a very important distinction to be made though between those episodes and now. In each of those periods, when kids left the workforce in favor of an education, government footed the bill. In other words, the burden was shared across society.

You see, in the late 1800’s, the American worker was defined as anyone over the age of 10. In response to the dramatic reduction in the demand for labor, state governments began mandating that kids stay in school longer, thereby dramatically reducing the participation rate and bringing the supply and demand for labor back in line. In 1934, it happened again and we began to include only those over 16 years of age in our employment statistics. If you think about it, by mandating that kids stay in school longer, and paying for that extended education, government was in a way paying these people not to work.

What makes this time around so unique is that although kids are being strongly encouraged (not mandated) to stay in school longer (ie attend college), it is the students themselves who must shoulder the economic burden. When you think of it in those terms, it begins to make sense that student loans are being offered and/or backed by the government. It also helps explain why Germany, Finland and several other countries have recently announced that their universities are now tuition free, and why I have been suggesting that student loan forgiveness should be on your macro radar.

In a way, education has served a dual purpose during these transitional phases. One is to reduce the size of the workforce at a time when demand for labor is experiencing an abrupt shift lower. The other is as a sort of insurance or protection against technology’s creep higher up the intellectual scale. When technology takes your farming job, you escape to where technology isn’t smart enough or adept enough to go, such as manufacturing. When it infiltrates manufacturing, you climb higher up that intellectual ladder, becoming better educated and escaping to the services sector, where rudimentary technology can’t compete. What happens now though, when a computer can not only beat the world’s greatest mind at chess, but can do it with a free app on your “smart” phone? Where do we escape to with a better education? What sector comes after services? What happens when computers move up the intellectual scale more rapidly than we can?

I will continue to explore these and other derivative issues for the impact is being felt in every country and every facet of life, driving policy and markets.​PSRelated to the previous edition, The Coming Seismic Shift in American Politics, be sure to add the fast food workers protest slated for April 15th to your macro radar.

About the AuthorFor nearly thirty years, Stephen Duneier has applied cognitive science to investment and business management. The result has been the turnaround of numerous institutional trading businesses, career best returns for experienced portfolio managers who have adopted his methods, the development of a $1.25 billion dollar hedge fund and 20.3% average annualized returns as a global macro portfolio manager.

Mr. Duneier teaches graduate courses on Decision﻿ Analysis in the College of Engineering, as well as Behavioral Investing, at the University of California.

Through Bija Advisors' coaching, workshops and publications, he helps the world's most successful and experienced investment managers improve performance by applying proven, proprietary decision-making methods to their own processes.

Stephen Duneier was formerly Global Head of Currency Option Trading at Bank of America, Managing Director in charge of Emerging Markets at AIG International and founding partner of award winning hedge funds, Grant Capital Partners and Bija Capital Management.​As a speaker, Stephen has delivered informative and inspirational talks to audiences around the world for more than 20 years on topics including global macro economic themes, how cognitive science can improve performance and the keys to living a more deliberate life. Each is delivered via highly entertaining stories that inevitably lead to further conversation, and ultimately, better results.

His artwork has been featured in international publications and on television programs around the world, is represented by the renowned gallery, Sullivan Goss and earned him more than 50,000 followers across social media. As Commissioner of the League of Professional Educators, Duneier is using cognitive science to alter the landscape of American K-12 education. He received his master's degree in finance and economics from New York University's Stern School of Business. Bija Advisors LLCIn publishing research, Bija Advisors LLC is not soliciting any action based upon it. Bija Advisors LLC’s publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, Bija Advisors LLC does not represent that it is accurate and it should not be relied on as such. Opinions expressed are current opinions as of the date appearing on Bija Advisors LLC’s publications only. All forecasts and statements about the future, even if presented as fact, should be treated as judgments, and neither Bija Advisors LLC nor its partners can be held responsible for any failure of those judgments to prove accurate. It should be assumed that, from time to time, Bija Advisors LLC and its partners will hold investments in securities and other positions, in equity, bond, currency and commodities markets, from which they will benefit if the forecasts and judgments about the future presented in this document do prove to be accurate. Bija Advisors LLC is not liable for any loss or damage resulting from the use of its product.